Iron ore price slide will continue, say experts

A dramatic slump in benchmark iron ore prices has seen the bulk commodity slip below $US100 per tonne today, and experts believe it could continue falling below $US80 per tonne before it starts recovering.

Prices for iron ore, which along with coal is Australia's most lucrative export, have not been this low since December 2009, creating headaches for Treasury revenues and the ASX listed companies that sell the commodity to Asia.

Shares in Rio Tinto were down $1.93 to $52.23 shortly before midday, while similar falls struck Fortescue Metals Group (down 25 cents to $3.99), BHP Billiton (down 56 cents to $32.86) and Atlas Iron (down 12 cents to $1.65).

The benchmark iron ore price had spent much of the year around $US135 per tonne, but began slipping seven weeks ago on the back of slowing construction activity in China, and an oversupply of steel in that country.

Overnight it slumped by almost 5 per cent from $US104 per tonne to $US99 per tonne, sending chills through the Australian market.

UBS expert Glyn Lawcock said he expected the price could continue falling for some time yet.

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“Now that it has broken through $US100 per tonne, traders I speak to think the price could get a seven in front of it," he said.

“We may not see a pick-up in demand until after the holiday season in October which means the iron ore price just drifts until then."

But Mr Lawcock said he expected the slump to be temporary because numerous big projects in China had been approved in the June quarter and were still going through the tendering phase at the moment.

Mr Lawcock said he expected construction activity on those projects to get underway in earnest in the December quarter, meaning the iron ore price would pick up again then.

"Our view is that it will be higher by year end. We think it will probably be back above $US120 per tonne by Christmas," he said.

Most analysts have long believed that a virtual “floor” exists beneath the iron ore price somewhere around $US120 per tonne.

That price is where a large number of high-cost Chinese iron ore producers have their break-even point, and given they typically supply around 30% of China's iron ore needs, most analysts have long believed the price could not dip below the “floor” for long.

ANZ commodities expert Natalie Rampono said the current dip below $US100 did not mean the “floor” theory was incorrect.

“We still think $US120 per tonne is the floor price for iron ore. Prices have the ability to punch through that floor price but only on a short term basis, like one or two months,” she said.

“In the near term prices could slip lower towards $95 per tonne but we don't see it sustaining those levels … Demand has eased but we think it will rebound as soon as the China steel supply overhang is wound down, and that could occur over the next six months.”

ANZ predicts that the iron ore price will average $US134 per tonne during the 2013 calendar year.

Benchmark iron ore prices had been expected to start their terminal decline around 2014 as huge volumes of extra exports hit the market.

Fortescue, BHP, Rio, Atlas and others have all spruiked aggressive expansion strategies in recent times, but there are signs that some of those plans are no longer going to emerge.

Most notably, BHP this week mothballed plans to build an outer harbour development at Port Hedland, which would have allowed it to export 100 million extra tonnes of iron ore each year.

The company plans to continue expanding its exports via the inner harbour at Port Hedland, but the scale of its volume growth will now be smaller.